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December 2016

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Even as the World Bank has lowered its growth projections for the world by half a percentage point to 2.4 per cent, Indonesia's economy is forecast to grow by 5.1 per cent thanks to continued policy reforms that have helped to counter the impact of slow growth.

“Prudent monetary policy, increased public investment in infrastructure, and policy reforms to improve the investment climate, are helping Indonesia maintain growth in the order of 5.1 percent,” said Rodrigo Chaves, World Bank Country Director for Indonesia, in the June 2016 edition of the Indonesia Economic Quarterly released by the World Bank.

According to the report, Southeast Asia's largest economy continues to prove resilient with GDP forecast to grow 5.1 per cent, mainly due to private consumption and public capital spending.

But weaker than expected global economic expansion may moderate its growth recovery although continued policy reforms can help counter the impact of slowing demand and financial market volatility globally, said the report entitled Resilience through Reforms.

Numerous policy reforms have been announced since September 2015, and there appeared a shift in trade and investment policy towards deregulation. However, it is not yet known whether effective implementation of policy changes is taking place, and many sectors remain closed or partly closed to foreign investment.

Increased private sector investment is essential for Indonesia, as pressures on public revenue may curtail the government's plans for much more infrastructure investments, which have supported economic growth. However, even with a lower revenue forecast and a larger fiscal deficit of 2.8 per cent of GDP, World Bank calculations show that 90 per cent of the original 2016 Budget investment target could be achieved.

While private consumption growth remained resilient at 5 per cent year-on-year, slowing growth in fixed investment due to reduced government spending has contributed to Indonesia's real GDP growing at 4.9 per cent year-on-year in the first quarter of 2016. Weak global demand continues to put pressure on exports, the report noted.

Currently, Indonesia's manufacturing exports are dominated by 'low-tech' products and operations are focused mainly on blending and assembly, making the country vulnerable to changes in a multinational corporation's location strategy. (SH)